Financial Planning, Investments, Trading & Wealth Management

What’s the Difference Between a Bank, a Credit Union and a Brokerage Firm?

Get a better handle on some of the financial jargon you may come across. Unless you’re accustomed to keeping wads of cash tucked under your mattress (where it doesn’t belong), it’s very likely you’re using a bank, brokerage or credit union—or a combination of the three—to help you manage your finances.

But just because you’re a customer of one of these places doesn’t necessarily mean you know what they’re all about. For instance, what makes a credit union different from a bank? Or a retail bank different from a commercial one? Can knowing these differences help you better manage your assets?

So to help you feel a bit more informed about where your money is actually being housed, we defined six common banking terms below. Read on to get a better handle on some of the financial jargon you may come across.

1. Retail Bank

A retail bank is what you likely use most often to take care of your everyday banking needs, like withdrawing cash or depositing a check. Retail banks offer a range of products and services, such as savings accounts, checking accounts, personal loans, debit cards, credit cards or home mortgages, that are geared toward the individual consumer (which is why this subset of the financial industry is also called consumer banking).

The local bank branch you visit to withdraw cash from the ATM? That’s a retail bank. However, not all retail banks are brick-and-mortar; many consumer-banking services are also available through online-only banks.

2. Commercial Bank

A retail bank is typically part of a larger commercial bank, which provides the aforementioned services (loans, credit cards, mortgages, checking and savings accounts, etc.) to both individuals and businesses. “For consumers’ purposes, the retail bank is the entity that they’re dealing with,” says Greg McBride, chief financial analyst at Bankrate.com. But the commercial bank will also have a corporate banking side that deals with small companies.

Commercial banks generally make their money by taking the deposits they receive from their customers and using those assets to lend money with interest to other individuals or businesses.

Many commercial banks also have an investment banking arm that specializes in products and services for large investors and corporate customers, such as advising on mergers and acquisitions, and trading securities.

3. Credit Union

Credit unions provide a lot of the same products and services that retail banks do; the major difference is that they are not-for-profit, cooperative financial institutions whose purpose is to benefit their members. They typically serve a particular group of people with something in common, also known as the field of membership. This could include a shared employer, geographic location, religious organization or labor union, for example.

Consumers might find that credit unions offer financial products or services with more favorable terms than those offered by large commercial banks. That’s because profits may be returned to members in the form of better account terms, lower interest rates, fewer fees or additional services, says McBride. And while both traditional banks and credit unions have a board of directors, “what makes [the board] unique at a credit union is that it’s typically run by volunteers,” McBride adds.

4. Brokerage Firm

A brokerage firm, or simply a brokerage, is a financial institution that facilitates transactions involving the trade of securities (the Wall Street term for financial instruments like a stock or bond that you can buy or sell). At most brokerages, stockbrokers serve a clientele of investors who trade public stocks or bonds, or want to invest in different types of funds. So if you wanted to buy a stock in company X or put some money into mutual fund Y, you would need a brokerage to help you do that.

A full-service brokerage provides a variety of services other than just trading. These might include market analysis and research, tax advice or retirement and estate planning. Since full-service brokerages provide a large number of services, they often charge investors higher fees or commissions than discount brokerages, which only execute trades without offering additional financial services.

5. Taxable Brokerage Account

A taxable brokerage account is an investing account you open through a brokerage firm that you fund with post-tax dollars. This money can then be invested in stocks, bonds, mutual funds, exchange-traded funds, cash investments and other types of assets. If you earned money on your investment at the time that you sold it, you may have to pay capital gains tax on those earnings. If you lost money, then you may be able to get a tax deduction by reporting a capital loss. You should always talk to your accountant or tax preparer for more information on how these taxes could apply to your situation.

6. Tax-Advantaged Account

By contrast, a tax-advantaged account helps reduce your tax burden either by 1) deferring the taxes on your contributions and investment growth until you make withdrawals in the future, or 2) by allowing for tax-free growth on your post-tax contributions, so you likely won’t end up owing taxes when you make withdrawals down the line. Tax-advantaged accounts are commonly used to save for retirement and can include Roth and Traditional IRAs and 401(k)s.